What “amortizing” means
An amortizing loan is repaid in regular installments that include both interest and principal, so the balance reaches zero at the end of the term. Each month the lender charges interest on the remaining balance; whatever is left of your payment reduces that balance.
Fixed payment (the standard schedule)
Most mortgages and car loans use a level payment that stays the same for the whole term. The formula is:
M = P × r / (1 − (1 + r)^−n)
where P is the principal, r the monthly rate (annual rate / 12 / 100) and n the number of months. In Europe and some other markets this is called an annuity payment.
Equal principal (declining payment)
Some lenders, especially outside the US, offer a schedule where the principal is split into equal parts and interest is added on the remaining balance. The payment starts high and falls every month:
Mₖ = P / n + (P − P × (k − 1) / n) × r
Worked example: $200,000 at 6% for 30 years
| Fixed payment | Equal principal | |
|---|---|---|
| First payment | $1,199.10 | $1,555.56 |
| Last payment | $1,199.10 | $558.33 |
| Total interest | $231,676.38 | $180,500.00 |
With the fixed payment, the first month’s interest is $1,000.00 (0.5% of $200,000), so only $199.10 goes to principal. That is why the balance falls slowly in the early years. The equal-principal schedule saves about $51,000 in interest here, but requires roughly $356 more in the first month.
Figures are principal and interest only, before rounding conventions a specific lender may apply.
Reading an amortization schedule
- Payment — what you pay that month.
- Interest — balance × monthly rate.
- Principal — payment minus interest; this is what actually reduces the debt.
- Balance — what you still owe after the payment.
How to pay less interest
- Extra payments toward principal early in the term have the biggest effect, because they stop interest from accruing on that amount for the rest of the loan. Check that your lender applies them to principal and has no prepayment penalty.
- A shorter term (e.g. 15 instead of 30 years) raises the monthly payment but cuts total interest sharply.
- A lower rate matters more than almost anything else — compare offers by APR, which includes most fees.
Frequently asked questions
How is a monthly loan payment calculated?
For a standard amortizing loan: M = P × r / (1 − (1 + r)^−n), where P is the amount borrowed, r is the annual rate divided by 12 (as a decimal) and n is the number of monthly payments.
Why does most of my early payment go to interest?
Interest is charged on the outstanding balance. At the start the balance is largest, so the interest part of a fixed payment is largest too; as the balance falls, more of each payment goes to principal.
Is an equal-principal loan cheaper?
At the same rate and term, yes: the balance falls faster, so less interest accrues in total. The trade-off is that the first payments are noticeably higher.
Does the calculator include taxes, insurance or fees?
No. It calculates principal and interest at the nominal rate only. Property tax, insurance, PMI and lender fees raise the real cost — compare the APR in your loan documents.